Money laundering

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Money laundering

Research paper

Course: “Special Topics in Global Business “ MIB475B

Executive summary

I decided to choose this topic because I think it is very interesting and actual problem. I believe that money laundering is a current interest topic for many reasons. First of all money laundering is very common in Russia from 1991 to today. Secondly, money laundering includes all countries of global economy and every year it damaged global economy. Thirdly, if we will know how it works, we will know how to fight against it.

My research will consist of two main parts:

In the first part I will explain what is money laundering, why it takes place and how it works.

Second part will contain information about fighting against money laundering. What is this? Who is fighting against money laundering and how it works.

In my research I used quotations from official sources such as fatf-gafi.org and telegraph.co.uk and others.

The purpose of this research is to collect information about:

1. international practice of money laundering

2. strategies and methods of applying this strategies and models

3. reasons and factors contributing money laundering

4. how to fight against money laundering

Introduction

Money laundering is the process of substitution of real illegal sources of funds to fictitious legal. Income from illegal activities are carried out through a series of transformations (conversion, the movement across the border, moving to the firm's capital, the issuance of a fictitious loan, etc.) to hide their original source and to make it appear that they are derived from a completely legal operations.

The meaning of money laundering is the substitution of their origin, but not tax evasion or cashing in, although as a secondary option it can be for this purpose. Laundered money can be used in legal way for business or for personal expenses.

money laundering strategy legal

1. Necessity of money laundering

The necessity of money laundering occurs in three cases. First, if the origin of the income was a crime: illegal drug trafficking, racketeering, corruption, etc. Criminals, who receive this kind of income, have to launder it in order to be free in spending this money. Second, if the entrepreneur or company covers part of legal income from increased tax revenue by understating or overstating expenses or using unaccounted cash. In this case, you must replace the real source of the money on other which taxed less or not taxed at all. Third, sometimes the recipients of money do not want to show the real source of money for security, ethical or political reasons. This relates to the activities of international non-governmental organizations in countries which are not allowed foreign funding of such activity as financing of terrorists or financing of election campaigns.

2. Factors contributing to money laundering

1. A high proportion of informal incomes and business, the existence of parallel economy, or "black market"

2. Insufficient mechanisms of control and monitoring activities of financial institutions. Non-compliance with international standards of financial regulation developed by specialized international organizations.

3. The high rate of corruption among state executive, law enforcement and judicial authorities

4. Inability or limitation opportunities of exchange financial information with foreign law enforcement agencies.

5. Inadequate procedures for the establishment of financial and non-financial institutions or opening branches abroad.

6. Legislating of the secrecy of financial transactions. The lack of requirements for transparency in financial transactions and ownership of assets.

7. The widespread of using by enterprises and banks of transactions that involving offshore companies

8. The existence of anonymous cash accounts and financial instruments, including stocks and bonds that allowed payment of money "to the bearer."

9. Access of financial institutions to international centers of trading precious stones and metals.

3. Methods of money laundering

When we are talking about methods of money laundering first of all we should talk about the strategy. There are many strategies of money laundering.

Models/strategies of money laundering

Three Steps Strategy (Exhibit 1.1)

1 Step - Placement

2 Step - Layering

3 Step - Integration

Placement

Placement is the physical placement of cash in the mobile financial instruments that are away from their places of origin, allocation in traditional financial institutions, non-traditional financial institutions, retailers, or completely outside of the country.

Layering is separation of illicit income from their source through a complex of chain of financial transactions designed to disguise the audited track of these revenues.

Integration

Integration is the stage of legalization process for creating of fictive income. During this stage laundered money returns into economy.

4. Four sector model (Exhibit 1.2)

In this model stand out sector and related washing step. The criteria are: the legality / illegality of operations and country of committing the underlying crime / country "laundering" of money.

The first sector is the country of the underlying crime/legality. In this sector is performing an internal pre-laundering.

The second sector is the country of the underlying crime / illegality. This sector is for collecting pre-laundered money and preparation for smuggling.

The third sector is the country of "laundering" money / illegality. This sector is for preparation for delivery of money into the legitimate financial system.

The fourth sector is the country of "laundering" money / legality. Here is having place are some disguising actions such as transactions or investment.

And the last model of which I would like to tell is Two stage model.

5. Two stage model (Exhibit 1.3)

The basic steps of this model are Money Laundering and Recycling.

The first stage is exchanging money for another currency (short-term operations)

The second stage is represented by medium-and long-term operations, by which the pre-laundered money is given to the visibility, derived from legal sources and are introduced into the legal economic circulation. The main problem of money laundering is thus reduced to the transfer of large amounts of illicit cash or other property in easily manageable financial instruments or other assets.

I tried to explain three the most common strategies, but money laundering it's not only theory and knowledge of these strategies. But it is also practical methods or technique.

6. Practical methods of money laundering

"Structuring" is an artificial fragmentation of financial operations on several operations, with small amounts of money. In this case, the funds are transferring not only from banking institutions but also from different post offices, pawn shops and other organizations. As a result, the funds accumulated in one or more accounts, and then absolutely legally transferred to the bank of another country. Another common way of illegal transfer of funds is illegal conversion of funds. The use of electronic payment , securities, futures and derivatives that are not necessarily directly related to the real goods.

The extensive system of so-called fictitious companies. The state registration of such enterprises is usually carried out under the lost and stolen passports. Then, preparing a set of documents provided to the bank to open a checking account. The account established for a fictitious company, over time accumulated non-cash resources, which are then transferred to the account of another fictitious company (or received by check cash).

Alternative banking systems. Money laundering in the so-called "Golden Triangle" (the area at the junction of Thailand, Burma and Laos) occurs through a complex chain of proxies to carry out a similar business from one generation to another, similar system in the Muslim world called hawala, has survived to the present day, based on the principles of nepotism and establish links of criminal groups. The accuracy and confidentiality of financial transactions in such systems is achieved by cruel punishment of violators. Moving through the channels of underground banking, "dirty" money does not get into the formal banking system. Alternative banks operate without a paper trail.

Fie chien, or "flying money", there is in China, which, like hawala , based on trust, family relationships, local social structures and the threat of imminent and severe punishment for any violator of unwritten rules. This system, which is sometimes referred to as a "system of notes" allows, by giving money to illegal banker in one country, to get them to another country in exchange for a "note" that is a kind of a check. This method of transferring dirty money is fast and convenient, free from transporting bulk, money leaving little trace and is also characterized by a minimum cost and limited commission of the banker.

7. Set of easy rules for money launders:

· The better the mechanism of money laundering imitates procedures of the legal agreements, the less chances of detection.

· The smaller the part of illicit funds into legal financial flows, the more difficult it is to detect.

· The larger the business structure of production and distribution of non-financial goods and services, depends on small firms, the harder it is to separate the legal from the illegal agreement.

· The higher the share of services in the economy, the easier in this country to launder money.

· The higher the degree of financial self-regulation of legal agreements, more difficult to track illegal money flows.

· The smaller the possibility of the use of credit cards and other cashless payment instruments for illegal financial transactions, the more difficult to detect cases of money laundering.

· The smaller the particle in the volume of illicit flows of legitimate income to the country through the border, the harder it is to find them.

· The more illegal activity penetrates into the legal economy, the fewer opportunities for its institutional and functional separation.

8. Examples of money laundering to which you can easily apply the models

The biggest in U.S history money laundering

Source of news: www.money.cnn.com

“Liberty Reserve, a major global online cash transfer business run out of Costa Rica, has been shut down and its executives arrested to face U.S. charges of laundering $6 billion.

According to charges unveiled Tuesday by U.S. Attorney Preet Bharara in New York, "Liberty Reserve has become a financial hub of the cybercrime world, facilitating a broad range of online criminal activity including credit card fraud, identity theft, investment fraud, computer hacking, child pornography and narcotics trafficking." According to the indictment, it moved tens of millions of dollars through shell company accounts maintained in Cyprus, Russia, Hong Kong, China, Morocco, Spain and Australia, among other places.

"The coin of its realm was anonymity, and it became a popular hub for fraudsters, hackers and traffickers," said Bharara. "The global enforcement action we announce today is an important step toward reining in the 'Wild West' of illicit Internet banking."

Arthur Budovsky, the founder of Liberty Reserve, was arrested in Spain by Spanish authorities on Friday, along with Azzeddine El Amine, described as his principal deputy. The two men are fighting extradition to the United States. Authorities said Budovsky is a former U.S. citizen who renounced his citizenship and become a Costa Rican national. Five other defendants also face charges.

Liberty Reserve was shut down over the weekend. According to the indictment, it had touted itself as the Internet's "largest payment processor and money transfer system." But authorities said it had never registered with the U.S. Treasury Department as a money transferring business, even though it had more than 1 million customers worldwide, including 200,000 U.S. customers. It handled 12 million financial transactions a year, according to the U.S Attorney.

The Treasury Department also took action Tuesday, naming Liberty Reserve as a money laundering organization, using powers under the Patriot Act to effectively cut the company off from the U.S. financial system. Any global bank that does business with Liberty Reserve could also be cut off from transactions with U.S. banks. Treasury said this is the first time it's used that power in relation to a cybercurrency provider.

Related special report: The cybercrime economy

The indictment charges that Liberty Reserve allowed accounts to use fictitious identities. Unlike traditional banks and legitimate online payment processors, it did not require customers to validate their identity information.” ¹

As you can see from this case, money laundering is the profitable business, but extremely dangerous, because if government will catch you…you will sit for long period.

Another recent news, also about amount of money with a lot of zeros.

Source of news : www. irs.gov

“Co-Owner of Los Angeles County Toy Company Sentenced in Money Laundering Case

On May 6, 2013, in Los Angeles, Calif., Dan “Daisy” Xin Li, co-owner of the Woody Toys, Inc., was sentenced to eight months in prison, followed by six months of home detention. Li's husband, Jia “Gary” Hui Zhou, will be sentenced at a later date. Li and Zhou pleaded guilty in September 2012 to conspiring to structure currency transactions with a U.S. financial institution to avoid the filing of a Currency Transaction Report. As part of their agreements, the couple forfeited to the federal government $2 million in proceeds that were derived from their money laundering scheme. According to court documents, Li and Zhou participated in an elaborate scheme known as a Black Market Peso Exchange, which is an underground money transfer system that enables international drug trafficking organizations to launder narcotics proceeds. The scheme used “structured” cash deposits in the United States to launder illicit proceeds generated by drug trafficking organizations based in Mexico and Colombia. From 2005 through 2011, approximately $3 million in structured, out-of-state cash was deposited into Woody Toys' bank accounts. During that same time, Woody Toys took in approximately $3 million in cash without filing the required federal documents. As part of the Black Market Peso Exchange scheme alleged in this case, foreign toy retailers with Colombian and Mexican pesos would contact currency brokers to buy discounted United States dollars, which they used to purchase merchandise from Woody Toys. The dollars being “sold” were allegedly proceeds from illegal drug sales that had been deposited in the toy company's accounts or delivered to the business. The Colombian or Mexican pesos that the currency broker received from the foreign toy retailer were remitted to the drug trafficking organizations. Previously in this case, Woody Toys, Inc. was sentenced in November 2012 to five years of probation after pleading guilty to money laundering conspiracy charges. The sentence prohibits the company from receiving payments of more than $2,000 in cash and the business may not receive cash from anyone who is not a customer. The company must also report the identity and contact information of all its customers. Finally, the business will be subject to unannounced examinations of its books and records.” ²

Money laundering is the set of operations for transformation illegal money into legal. The necessity of money laundering occurs in three cases. First, if the origin of the income was a crime. Second, if the company covers part of legal income from the government. Third, when recipient of money do not want to show the real source of money. There are at least nine factors contributing to the money laundering among them corruption and limitation of opportunities for exchanging financial information with foreign law enforcement agencies which is very bad. Also there are several methods and models of money laundering, the most common is Three steps method/model, which consist of three steps: Placement Layering Integration. The most difficult and important step is Placement. A lot of tricky methods were invented since money were introduced in society at all. From Structuring to alternative or underground financial institutes such as Hawala in Muslim world or Fie Chien in China.

By the way, although there are a lot of tricky technologies, strategies and ways to launder money, people still fall for the bait of their own greed. Greed makes them blind, and usually people are forgetting about easy rules, which were also listed at the end of the first part. As a result someone catches them and send to prison. But who is that someone? The answer is FATF, which will be discussed in the second part of research.

9. Fighting against money laundering

Fighting against money laundering is an important aspect of global relationships in general. It is so for many reasons. Firstly, money laundering is damaged global economy every year for huge amount of money. Secondly, because of money laundering international terrorist organizations have easy supply chain. Thirdly, money laundering is contributed to the development of the crime all around the world, because without opportunity to launder money crime will face difficulties to survive.

Every country which involved in global economy has this problem. Each country has their own methods and strategy for fighting against money laundering, but since 1989 when FATF (Financial Action Task Force) was founded by countries of G7, fighting against money laundering became international, global issue.

FATF (Financial Action Task Force)

“The Financial Action Task Force (FATF) is an inter-governmental body established in 1989 by the Ministers of its Member jurisdictions. The objectives of the FATF are to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system. The FATF is therefore a “policy-making body” which works to generate the necessary political will to bring about national legislative and regulatory reforms in these areas.” ³

The members of FATF

FATF comprises 34 members and 2 regional organizations which represented two main financial centers. Table 1 contain full list of members FATF.

Associate members

An important role in the global distribution of international standards of fighting against money laundering and terrorist financing, play regional groups established by FATF in different regions of the world.

The main task of these agencies is the implementation of anti-money laundering and terrorist financing in their respective regions, in particular through mutual assessments of national systems of its members in accordance with international standards for combating money laundering (in particular, the FATF 40 +9 Recommendations) and research trends and methods (typologies) of money laundering and terrorist financing, specific to the region.

FATF and regional FATF-style group together form a single international system (network) for the distribution and implementation of international standards to combat money laundering and terrorist financing, as well as monitoring their implementation at the national level

Table 1 members of FATF

Table 2 Associate members of FATF

Asia/Pacific Group on Money Laundering (APG)

Caribbean Financial Action Task Force (CFATF)

Council of Europe Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL)

Eurasian Group (EAG)

Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG)

Financial Action Task Force on Money Laundering in South America (GAFISUD)

Inter-Governmental Action Group against Money Laundering in West Africa (GIABA)

Middle East and North Africa Financial Action Task Force (MENAFATF)

Structure

The main decision-making tool is the FATF Plenary meeting, which meets three times a year, as well as the FATF working groups of:

Estimates and implementation;

Typologies;

Counter the financing of terrorism and money laundering;

Review of international cooperation.

FATF pays considerable attention to the cooperation with international organizations such as the IMF, World Bank, United Nations Office on Drugs and Crime. These structures implement the programs aimed at combating money laundering and terrorist financing. One of the main instruments for implementing the FATF recommendations at the national level are the Financial Intelligence Unit (FIU) responsible for the collection and analysis of financial information within each country to identify the flow of funds illegally obtained.

Objectives

“The objectives of the FATF are to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system. Starting with its own members, the FATF monitors countries' progress in implementing the FATF Recommendations; reviews money laundering and terrorist financing techniques and counter-measures; and, promotes the adoption and implementation of the FATF Recommendations globally.” ⁴

FATF 40 +9 Recommendations

FATF documents, in particular the FATF 40 +9 Recommendations, constitute a comprehensive set of organizational and legal measures to establish in each country, an effective regime for combating money laundering and financing of terrorism, complexity and versatility of which is expressed in:

The widest coverage of issues related to the organization of anti-money laundering and terrorist financing on the national and international levels;

close relationship with the international conventions, UN Security Council resolutions, acts of specialized international organizations devoted to AML / CFT;

providing with opportunities for flexibility in the implementation of the FATF 40 +9, and providing recommendations taking into attention national features and the legal system.

The FATF Recommendations do not duplicate or replace the relevant provisions of other international instruments, and, if necessary, complementing them together into a single system of organizational principles and the rule of law, while playing an important role in the codification of the rules and regulations in the field of AML / CFT. In accordance with UN Security Council Resolution number 1617 (2005), 40 +9 FATF Recommendations are binding international standards for States - members of the United Nations.

Unfortunately not all countries ready to cooperate with FATF, therefore FATF was created BLACK LIST.

In this list of countries, countries which don't cooperate with FATF were divided into three groups.

Into the first group were included countries of high level risk which don't want to cooperate, and against them global society takes some measures. The second group includes countries with a high level of risk against which the measures are not applied. The third group includes countries whose government is ready to cooperate, but does not have real opportunities for that.

Conclusion

For conclusion I want to note some main points of fighting against money laundering.

For fighting against money laundering was created international organization FATF. The main purpose of creation FATF was: Fighting against money laundering, measures for reducing financing terrorist organizations. The members of FATF are 34 counties all around the world and 2 regional organizations which represented two main financial centers. The main tools of FATF are set of recommendations called 40+9 and FATF Black List.

Exhibit 1.1 Three Steps Strategy

Exhibit 1.2 Four sector model

Exhibit 1.3 Two stage model

Exhibit 2.1 FATF Black list

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